The Kelkar committee's recommendation to lower the peak rate of Customs duty from 25 per cent to 20 per cent in 2004-05 and 10 per cent in 2006-07 is set to cause substantial consternation in corporate circles.

The peak rate of 10 per cent is significantly lower than the peak rate of 20 per cent in the member countries of the Association of South-East Asian Nations. The Asean rate has often been cited as the benchmark for India.

In a thinly-veiled criticism of the proposal, the Federation of Indian Chambers of Commerce and Industry said on Friday that the proposed cut in the peak Customs rate should go hand in hand with "the removal of the disabilities facing industry."

In its recent pre-Budget memorandum to the government, Associated Chambers of Commerce and Industry  had proposed a peak Customs duty rate of 30 per cent for 2003-04.

The Associated Chambers of Commerce and Industry also felt such a reduction would place industry at a disadvantage.

In a statement issued on Friday, the industry association said while the Kelkar committee had recommended a sharp drop in the peak Customs duty, "no mechanism has been devised for removing the artificial tax barriers within the country in the form of inter-state taxes."

The reduction in the peak rate is not the only concern of industry about the Kelkar panel's recommendations.

Industry is also worried about the proposed reduction in the duty differential between raw material and semi-finished goods, and finished goods.

At present, while raw materials and semi-finished goods attract a Customs duty of 15 per cent, an import duty of 25 per cent is levied on finished goods. This gives domestic producers of finished goods a protection of 10 per cent.

While the Kelkar committee has said this differential of 10 per cent should be maintained when the duty is reduced from 15 per cent to 10 per cent on raw materials and semi-finished goods, and from 25 per cent to 20 per cent on finished goods, in 2004-05, the duty advantage should be reduced to 5 per cent for raw materials and 2 per cent for semi-finished goods by 2006-07.

While recommending a peak rate of 10 per cent by 2006-07, the committee has said the duty on raw materials should be set at 5 per cent and that on semi-finished goods at 8 per cent.

In its pre-Budget memorandum, Federation of Indian Chambers of Commerce and Industry had said the duty differential between raw materials and finished goods should be 10-15 per cent.